The “Right” Way to Add Adult Children to Your Bank Accounts

By Brian Ellenbecker CFP®, EA®, CPWA®, CIMA®, CLTC®

There actually is a “right” (and a "wrong") way to add adult children to your bank accounts

It’s a scenario we see often—an older adult wants to add one of their adult children to a bank account.  Typically, it is done for convenience purposes in case something unexpected happens.  The older adult correctly realizes that it’s important to have a trusted individual lined up to help handle their finances should the need arise.  The “easy” choice is to just add an adult child as a joint owner on the account.  This is a great example of the “easy” option not being the best option.

Risks of Adding A Joint Owner

There are many unforeseen consequences and risks associated with adding a joint owner to an account.  Here are some of the most common issues that arise:

  • The co-owner will inherit the entire account upon your death. If that individual is the sole beneficiary of the estate, this might work out.  If not, there are numerous problems that could arise:
    • This ownership structure could go against what your estate plan dictates. If your will leaves assets to be divided between multiple individuals, this account will not be included in the property division calculation.
      • If the co-owner agrees to split the funds between beneficiaries, that individual will be making personal gifts. Depending on the size of the account, these gifts could have adverse estate planning consequences.
    • If there is an unwritten agreement that the co-owner will divide the assets upon the original owner’s death, there is no way to legally enforce that. It’s possible that the original owner’s wishes are not carried out if the co-owner changes their mind for whatever reason.
  • The co-owner now has full access to the assets in that account. They can withdraw funds without the other owner’s consent.  Withdrawals by the co-owner are also considered a gift from the original owner at the time of the withdrawal.
  • A co-owner’s creditors have a claim to this account in any legal action, including divorce.
  • Co-owners are easy to add but can be hard to remove. All owners will need to agree on the removal, which could be difficult if there is a strained relationship.
  • The co-owner isn't responsible for taxes on the account. However, the Internal Revenue Service can come after them as a joint owner if the primary owner fails to pay the taxes owed.

What is the “right” way to handle this situation?

First, check your estate plan and talk through it with your estate planning attorney.  You may have existing documents in place that allow you to address any issues that may arise in the event of your death or incapacity.  If you don’t have an estate plan in place, now is a great time to work on developing one.

To facilitate granting authority over an account to another individual, consider the following options:

  • Add a Power of Attorney. This can be done either by having an estate planning attorney draft a power of attorney document or by contacting the financial institution where the account is held.  Most institutions allow an account owner to grant another individual full or limited authorization using the firm’s own form.  Some institutions may even be hesitant to accept a written Power of Attorney document and prefer their own form.
    • There are several types of Powers of Attorney (POA), with differing levels of authority granted to the agent:
      • Durable Power of Attorney – A durable POA authorizes someone else (an agent) to handle certain matters, such as finances or health care. If a power of attorney is durable, it remains in effect if someone becomes incapacitated, such as due to illness or an accident.  Durable powers of attorney help plan for medical emergencies and declines in mental functioning and can ensure that finances are taken care of.
      • Springing Power of Attorney – Most powers in a POA take effect immediately upon their execution. However, with a springing POA, the agent only has authority once incapacity occurs.  It is very important that the standard for determining incapacity and triggering the power is clearly laid out in the document.
      • Limited Power of Attorney – Limited POA grants the agent certain powers but does not have full authority over the account. They may be able to make transactions or perform administrative tasks but are usually not able to make withdrawals or change beneficiaries.
    • Transfer ownership to your Revocable Living Trust. A revocable living trust typically contains provisions as to how assets are managed in the event of incapacity or death.

To facilitate the transfer of the asset to your heirs, you can do one of several things:

  • Add a Payable-on-Death (POD) or Transfer-on-Death (TOD) designation to the account. Adding either a POD or TOD simply adds a beneficiary to the account.  You can name one or more individuals as primary and contingent beneficiaries.  POD designations are used at most banks, while investment firms use TOD designation.  POD and TOD synonymous—different industries simply use different terminology.  The biggest advantage to TOD or POD beneficiaries is that accounts with POD or TOD designations pass directly to the beneficiaries without going through probate.
  • Transfer the ownership of the account to a revocable living trust. If the account is owned by the trust, it will pass to the beneficiaries of the trust outside of the probate process.  If you already have a revocable living trust in place, transferring ownership is the preferred course of action.

As with any estate planning discussion, there are pros and cons to each decision.  If you have questions regarding the best course of action in your situation, please do not hesitate to reach out to your Shakespeare advisor.  We would be happy to discuss your options further.